Friday, August 22, 2014

When Will the Education Bubble Explode?

My piece on the role that student loans have played in Occupy Wall Streethas inspired several guest posts. Here is another one. Timothy Smith writes The Echo Boom Bomb, a blog featuring financial, economic and socioeconomic analysis of the Millennial generation (also known as Echo Boom Generation or Generation Y). The Echo Boomers or Millennials are people born between 1982 and 1995. Mr. Smith currently advises corporations and organizations on how to market products, services and ideas to the Millennial generation.

Is the education bubble about to explode? Some bloggers, like Mish, tend to think so, while others, like Catherine Rampellof Economix, still see value in education. Even entrepreneurs, like Peter Thiel, recently joined in the discussion, as some entrepreneurs are offering alternatives outside of education and trying to change the current zeitgeist of “college degrees are absolutely necessary.” One thing many of these individuals agree on: the cost of education is growing and it’s placing an enormous burden on students.

In order to assess the value of education and its future, three areas come into immediate focus: the current attitudes about education among the Millennial generation (most of whom are being educated), the warning signs of an education bubble, and the changing attitudes toward education.

I spent over five years working at Wells Fargo Bank NA, the last year and a half collecting data on the Millennial generation. One of the many financial questions I asked Echo Boomers (another term for the Millennial generation due to its massive size) was, “What are your financial goals?” The results surprised me: over half of Echo Boomers stated that they planned to attend college, finish their current degree or continue pursuing an advanced degree. In other words, Echo Boomers believe in higher education. While this is a positive sign if you work in the educational field, it does bring a challenging question to the table: if over half of Echo Boomers pursue a degree, won’t highly skilled fields end up paying more in the long run?

The answer may seem like a resounding yes, but the truth may shock you. Some college students pursue liberal arts degrees; degrees that aren’t necessarily required in fields. Students pursuing heavy math-related fields seem to have little – if any – trouble. I spoke with one young man while working at Wells Fargo, Matt, who was pursuing his B.S. in mathematics. Unlike many of his liberal arts peers, Matt had multiple job offers while he was in school – all paid internships. Matt picked his favorite offer and worked while finishing his degree. The same held true for those in physics, medicine, engineering and world languages. In other words, the current positive attitude toward education is accurate if a student chooses the right degree (student readers: consider a math-related field if you want job security).

But what if Mish and Peter Thiel are right about a future education bubble? Are there warning signs like there was with the real estate bubble? I’ve argued in a post titled, When Will the Higher Education Bubble Pop, that we should be watching for four major signs with one disclaimer here: it’s possible that these four signs may never come. These warning signs would be favorable laws toward discharging student loans in bankruptcy (making it more challenging for students to receive money for education); a societal zeitgeist toward education changing (for instance, businesses preferring certification or a degree from something similar to the Khan Academy over traditional colleges); a major recession coming back to the United States, taking away more employment (making it more difficult for student withloans to pay back their loans); students becoming discouraged by negative news toward education (causing many to drop out or to avoid college).

Of course, some readers might wonder if all four signs must come to fruition in order for the education bubble to pop, and the answer is no. However, if all four do occur, the education bubble collapse will happen regardless of the current circumstances.

The final point that few writers address when it comes to education (and perhaps the most important point of all) is the changing attitudes toward education. As already discussed, the Millennial generation believes in education, at least indicated by trends of college enrollment and my study where over half expressed higher education as a financial goal. However, what will this generation say about education in ten years? Or twenty years? If education doesn’t pay the dividends to Echo Boomers that they were promised, their educational stories to their children will be similar to Baby Boomers’ stories about real estate: everyone was doing it, creating an overvalued situation and it collapsed. Most of the Echo Boomers who expressed interest in higher education hadn’t graduated, or graduated in a math-related career field. Other Echo Boomers, who graduated with a heavy student loan burden and a degree that didn’t pay as well, told opposite stories: education was a terrible investment. Those stories will be passed on to the next generation and questioned in the next round of books: will education as a good investment remain as attitudes change?

At this present time, I don’t see the education bubble popping. But the education bubble could pop quickly because two of the major factors – the current and future attitudes – tend to change faster than many economists know (consider how quickly Americans changed their spending behavior after the last recession). Or the education bubble could pop in the sense that there’s a liberal art explosion – students finally realizing that math-related fields trump art-related fields. Either way, I do agree with both Mish and Thiel on one thing: the amount of student loan balances that we see are unsustainable and something will eventually happen.

A common contribution is essential for the maintenance of the public forces and for the cost of administration. This should be equitably distributed among all the citizens in proportion to their means.

Declaration of the Rights of Man

Over and over again courts have said that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.